Renting vs. Owning
Buying a home can be a great way to invest in your future.
Real estate tends to see a strong return on investment over the long term. And it makes up part of a well-rounded investment portfolio.
But there’s no doubt about it: buying a home is also one of the biggest financial decisions you will make.
There are advantages to both renting and buying. Ultimately, it will come down to what makes best sense for you and your lifestyle. For this reason, it’s important to consider your options and seek expert advice.
Let’s break some of these advantages down.
Advantages of Renting
Lower costs – When you rent, you don’t have to worry about paying property tax or maintenance costs. Rent tends to be cheaper than mortgage payments (but not always).
Greater flexibility – Unlike a mortgage, renting gives you more freedom to move with fewer or no penalties.
More time – The responsibility of fixing up rental properties falls on landlords and property managers. When you rent, you don’t have to spend time on these projects.
More available cash flow – As long as your rent isn’t eating up a huge chunk of your pay, you will have more available cash flow to put towards alternative investments.
Advantages of Owning
Building equity – With every mortgage payment you make, you will build equity in your home. Your payments will include interest payments, but the amount that goes towards interest will decrease overtime. You can access the equity in your home should you ever need extra cash.
Greater stability – When you own your home, you won’t face eviction. Your living situation is more dependable and can reduce stress caused by the uncertainty of renting.
Retention of any capital gain – If you eventually sell your home, you may realize a capital gain. As long as the property was your principal residence, you won’t have to pay tax on this gain and can pocket the profit tax-free.
Building good credit – If you make all your mortgage payments on time and in full, you will make a big, positive impact on your credit score.
More control – Your house, your rules! You have the freedom to paint, have pets, and make home improvements to your heart’s content.
Investment in a generational asset – Real estate is very straightforward investment. If you pay off your mortgage loan, you will have an asset that can support you in old age and that you can pass on to your family. Like many other assets, the value of real estate can fluctuate considerably in the short term, but over the long term it is shown to be stable and to increase in value.
After reading the above, perhaps you’re thinking, “Home ownership sounds great. But how do I know I can afford it?” If you’re unsure, you can apply the 5% rule.
Apply the 5% Rule
When you rent, your rent payments are your unrecoverable costs (meaning money you won’t recoup).
When you own, things like property tax, maintenance costs, and mortgage interest payments are your unrecoverable costs. As a rule of thumb, the unrecoverable cost of homeownership is about 5% of the home’s value annually.
The 5% rule works as follows:
If you can rent annually for less than 5% of the value of a comparable home, you might be better off renting and investing the difference. If renting is more than 5% annually (or about on par), that’s a good indication that you’re better off buying.
It’s important to remember that neither renting nor owning is a superior option, necessarily. Both have pros and cons.
The decision of whether to rent or buy is highly personal and depends on where you live, your values, and your vision for your life.
For Jencor, there are no cookie cutter approaches. We offer mortgage advice tailored to our clients’ unique circumstances.
Use the information outlined here to start asking yourself the right questions and reach out when you’re ready to talk your decision through.
We are here to help, and our advice is always free!